High volatility and painful stock market losses defined the first half of 2022 even before June 13, but on that day, the market officially entered bear territory, according to the New York Times. The S&P 500 shed nearly 4% of its value in one trading day as investors fretted that the Fed would announce a massive interest rate hike in response to ever-rising inflation.
With anxiety and red ink stymying investors throughout the spring, it’s hard to imagine what surprises the summer might have in store. GOBankingRates asked a variety of financial pros for their best guesses. This is what they said.
The Current Downturn is Probably Near Its Bottom
The S&P 500 — the most reliable benchmark of the stock market as a whole — is down 22% since the start of the year. The tech-heavy NASDAQ, where most of the damage was done, is down by nearly 32%. That’s a loss of nearly one-third of its value in just six months.
“Typically, we sell off 30% before we head into a recession,” said Derek Horstmeyer, a finance professor at George Mason University’s School of Business. “Given we are already down 20% to 25%, I would expect not too much more of a sell-off if we are indeed going into a recession.”
If that’s the case, selling is the worst thing you could do right now. You’d be selling near what’s probably the bottom after sustaining steep losses while positioning yourself to miss out on the recovery that’s sure to follow.
In fact, now is probably a good time to buy since just about everything is trading at a discount. “It is certainly not a time to dump your equities,” said Horstmeyer. “If anything, one should be dollar-cost averaging and buying more here.”
Brace for Heavy Volatility, but Avoid Panic Selling
Although the worst is probably behind the market, you’d be irresponsibly optimistic to expect smooth sailing between now and fall — especially in light of the current monetary policy that officials are using to try to counter inflation.
“It will certainly be volatile over the next six months as the Fed continues to raise rates,” said Horstmeyer.
On June 13, Bloomberg reported that Wall Street predicts a massive rate hike of 75 basis points in the coming days or weeks — that’s what sparked the day’s massive selloff.
“The VIX is near a two-year high,” Horstmeyer said in reference to the Chicago Board Options Exchange’s CBOE Volatility Index, which measures the stock market’s expectation of volatility. “But this volatility is not a sign that you should sell out.”
Investors Will Continue To Seek Refuge in the Bond Market
With seas so stormy, it’s easy enough to guess where all of those dollars that investors pulled out of the stock market are landing.
“Certain traders and investors who wish to decrease their total portfolio risk will likely continue to flock to the bond market,” said Michel Cocke, CEO of the real estate firm 253 Houses.
The reason behind the logic is simple. “Bonds can operate as a hedge against stocks,” said Cocke.
Not only do bonds offer refuge in a stock market storm, but as inflation and interest rates rise, so do bond yields. According to the Wall Street Journal, individual investors poured $20 billion into U.S. Treasury ETFs between late April and late May, the biggest four-week influx of cash in three decades.
Purchases of I Bonds — with their impressive 9.62% yield — have totaled nearly $15 billion since November, roughly $6 billion more than the previous 20 years combined.
With the I Bond rate locked in through October, that trend will almost certainly continue throughout the summer.
Some Sectors Will Be Much Safer Bets Than Others
Stocks that forego big gains in favor of lower volatility are also likely to perform well this summer.
“At times like this, defensive stocks — companies that sell things we need every day, such as healthcare — tend to do well,” said Rachael FitzGerald-Finch of Fitzonomics.
It’s not bad advice. Wolfe Research recently released a report that said a recession is likely in 2023, or even as early as the fourth quarter of this year. The firm’s guidance? Buy defensive dividend stocks.
On the other hand, Cocke expects that investors will find some relief in stocks that represent a shift back to pre-pandemic life. “Expect greater movement among the different sectors of the stock market, notably from goods-oriented corporations to service providers,” he said.
Here, too, there’s plenty of evidence to back up the assertion. At the end of May, the Washington Post reported that spending patterns were beginning to reclaim the balance between goods and services. During the pandemic, spending on services like restaurants, flights, entertainment and movies plummeted while people spent more on things like TVs, computers and DIY home improvement projects.
Stocks that represent the national shift back to the previous goods/services equilibrium are likely to fare best this summer.
Ignore Your Crystal Ball and Stick With Your Strategy
The smart money usually rides on the investor with a long-term plan that’s designed to weather both the good months and the bad — the next trading session, after all, is always a mystery.
“The truth is that no one can predict what will happen in any given month or year,” said Henry Abenaim, CEO of Fundingo. “The only way to know for sure is to wait and see what happens — which is exactly what we’re doing right now. Our job as investors isn’t to predict the future. It’s to make the best decisions we can with the information available at the time. That doesn’t mean we should stop trying to understand how markets work and how they might react in different situations. It just means that when it comes time to make an investment decision, we need to keep our emotions out of it and focus on facts rather than rumors or hopes or wishes or predictions or opinions or anything else that might cloud our judgment.”